Keeping the business moving
Net working capital is current assets minus current liabilities. It measures the resources supporting day-to-day operations, but it is not the same as cash available to spend.
Much of a healthy working-capital balance can be tied up in inventory or in customer balances that have not yet been collected.
Key points
- Working capital funds the gap between paying and collecting.
- A large balance is not automatically a good sign.
- Speed matters as much as size.
Two formulas
NWC = Current assets − Current liabilities
The short-term resources supporting operations.
CCC = Inventory days + Receivable days − Payable days
The number of days cash is tied up before it returns through sales and collection.
Days figures compare a balance with an annual flow: days = balance ÷ annual flow × 365. Use cost of goods for inventory and payables, and revenue for receivables.
A worked example
With current assets of ৳420,000 and current liabilities of ৳260,000, net working capital is ৳160,000. Much of that amount may be inventory or unpaid customer balances rather than cash.
If inventory sits for 84 days, customer balances take 37 days to collect, and suppliers are paid in 42 days, the cash conversion cycle is about 79 days. The business funds roughly 79 days of operations from its own cash.
Managing the cycle
A business can shorten the cycle by holding less inventory, collecting from customers sooner, or negotiating longer payment terms with suppliers. Each choice has a trade-off: lean inventory can mean lost sales, and slow payment can strain supplier relationships.
Fast-growing businesses often consume the most working capital. Growth ties up cash in stock and receivables before customers pay.
Key points
- Shorter cycles free cash for investment.
- Growth can be a cash drain, not a cash source.
- Balance efficiency against resilience.
02 / Calculate
Measure the cash cycle.
Enter balances and annual flows to see net working capital, the current ratio, and how long cash stays tied up.
A retailer holding inventory and offering short credit to trade customers.
Cash conversion cycle
79days
Net working capital is ৳1.60 L. Cash is tied up for 79 days before it returns through sales and collection.
Current ratio
1.62×
Net working capital
৳160,000.00
Where the days come from
Cash conversion cycle = inventory days + receivable days − payable days = 84.2 + 36.5 − 42.1 = 78.6 days.
Days are calculated from annual flows using a 365-day year. Averages are more accurate than year-end balances when the business is seasonal.
03 / Apply
A growing wholesaler runs out of cash
A wholesaler doubled sales but its bank balance fell to zero. Inventory and receivables grew faster than payables, and the cash conversion cycle stretched from 60 to 95 days.
The assumptions
- Suppliers offer 30-day terms.
- Customers take 60 days to pay.
- Inventory must be held for six weeks of expected demand.
What to take away
01
Growth in stock and receivables absorbs cash.
02
A shorter cycle funds growth without new borrowing.
03
Working capital is a management decision, not a fixed number.
Your turn
0 of 3 answered
01Question
Current assets are ৳420,000 and current liabilities are ৳260,000. What is net working capital?
02Question
Inventory days are 50, receivable days are 50, and payable days are 30. What is the cash conversion cycle in days?
03Question
Which action shortens the cash conversion cycle?
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OpenStax · Principles of Finance (free textbook) ↗Educational sample content. Worked examples use hypothetical figures. Dates refer to the note's latest content update.